Articles Published in March, 2011

Just today, the WTO dispute settlement panel essentially voted in favor of several allegations from the EU that the US provided subsidies to Boeing Co. for civilian aircraft that weren’t in compliance with SCA (Subsidies and Countervailing Measures) Agreement rules. This resulted in, the European Communities allege, unfair export advantages for Boeing.

In the most telling passage of the ruling, the panel split the difference between faulting US subsidy and fully siding with the EU:

The Panel upheld the European Communities’ claims that: (a) some of the measures maintained by the States of Washington, Kansas, Illinois and municipalities therein, the NASA aeronautics R&D measures, some of the DOD aeronautics R&D measures, and the FSC/ETI and successor act subsidies, constituted specific subsidies.   The Panel estimated the total amount of these subsidies between 1989 and 2006 to have been at least $5.3 billion;  (b) the FSC/ETI and successor act subsidies constituted prohibited export subsidies; (c) some of the specific subsidies (i.e. the NASA and DOD aeronautics R&D subsidies, the FSC/ETI and successor act subsidies and the Washington State and municipal B&O tax subsidies) caused adverse effects to the European Communities’ interests in the form of serious prejudice, finding that the effect of these subsidies was displacement and impedance (or threat thereof) of Airbus large civil aircraft from third country markets, significant price suppression and significant lost sales.

The panel suggested that the US remove some of the subsidies, which could make a dent in Boeing’s operations in certain states. The EU, mainly on behalf its own home aircraft juggernaut, Airbus, had claimed the subsidies were worth $19.1 billion between 1989 and 2006, but the panel’s drastically reduced estimate, as detailed above, only came to at least $5.3 billion. (The WSJ article on the matter, incorrectly denotes these figures in Euro.) Boeing is undoubtedly one of the larger industrial aluminum and titanium buyers in the world; will this ruling be a major blow to their global ability to compete? Probably not. Nonetheless, it’s another significant mini-battle in the “Airliner Wars between Boeing and Airbus.

–Taras Berezowsky

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Tin has been one of the wonder boys of recent months, powering up to over $32,000 per ton in the early part of the year, falling back briefly to $28,000 in March and then forging back up to over $31,000 while other superstars like copper have struggled.

Source: LME

So what on earth are tin buyers meant to make of this — and can they expect prices to continue to rise this year? Many buyers are exposed to tin prices second-hand, by which I mean they consume tin plate where they are exposed to both steel and tin fluctuations and prices change annually or quarterly, not weekly or even monthly. Others, like solder consumers in the electronics industry, face price rises again, only periodically adjusted on a trailing average. The impact of recent price gains has yet to be felt and although consumers may have prudently been stockpiling excess inventory metal as they saw the spot price rise, sooner or later — probably sooner — revised higher prices will feed through.

The bulls would have it that tin prices have further to rise. Lars Steffensen, managing partner at Ebullio, told the Reuters Global Mining and Steel Summit that he listed tin as his hottest metal for higher prices, above copper, lead and zinc. “I don’t think (aluminum) is going to double from here, whereas I think there is a very good chance that tin could do, he is quoted as saying by Reuters. In a separate and earlier Reuters article he is again quoted as saying the metal could reach $50,000 a ton. “There is going to be less and less available. People will have to pay higher prices,” he added. “On the supply side you have output problems, (while) consumption is strong. On the supply side, he is referring to the two top producers China and Indonesia. China is a net importer even though the country is the world’s largest producer, so domestic production has failed to keep pace with rising demand while Indonesia’s PT Timah, the world’s biggest integrated tin miner, shipped only 40,413 tons of refined metal in 2010 down from 45,086 tons in 2009. Production has been hampered by bad weather, particularly heavy rains and a long running crackdown on illegal mining.

Production has little chance of rising from current levels in the next few years, new resources are limited and it will take some years to bring significant additional production online. So the main hope in capping prices is a slowdown in demand. So far, only the power problems following Japan’s earthquake and tsunami are expected to have any significant impact as it temporarily slows domestic electronics production and consumption. So far, China has not reported any slowdown due to the disaster, but time will tell if any meaningful disruption to the component supply chain hinders tin solder demand over coming months.

The only significant block to higher prices, apart from a global or at least Asian slowdown in demand, is a dropoff in investor appetite for the metal. Exchange open interest on the number of outstanding contracts on LME tin futures has risen to 20,795 lots, or 103,975 tons, from 15,992, or 79,960 tons, in early September when the latest price surge started. There are commodity trading funds and hedge funds that are sitting there long, and which will want to sell at some point, and their sales volumes are not going to be absorbed by the market in one go. The main risk to the downside is that China slows under the double drivers of Japanese supply and demand disruption and over-zealous Chinese domestic credit tightening. If those investors see exchange-traded stocks rising or import figures falling, there is the chance they will exit long positions and we could see a significant price correction to the downside. On the balance of evidence, however, it is not likely to be long lived.

–Stuart Burns

An article in Mineweb last week reported that silver imports in India had dropped off dramatically this year and suggested the high price may be to blame. Silver imports into India from April 2010 to February 2011 dropped to 343 tons from 451.5 tons in the same period of 2010. The largest precious-metal importing region is Gujarat, where nearly 162 tons were imported in January, but dropped over 70 percent in February to 47 tons and were reported by an official of the Gujarat State Export Bureau as reaching on 16 kgs in March, by the 18th.

The price is certainly high, even compared to other precious metals, as this table from ETF Securities illustrates. Silver has risen higher relative to both other precious metals and other commodities than any other asset class.

Source: ETF Securities

Indeed, what this table underlines is that relative to gold, silver has been the preferred investment choice. One of several trends in silver favored among the investment community is silver’s relentless return to form compared to gold as expressed by the gold/silver ratio. As a Telegraph article explains, when gold and silver were used as currency it was recognized that 16 ounces of silver had the same degree of purchasing power as one ounce of gold, creating a 16:1 silver/gold ratio.

Source: ETF Securities

The last time that ratio stood was briefly in the late 1970s; since then, as this graph from ETF Securities illustrates, the ratio has been as extreme as 100:1, and in the more recent past, 80:1, with a long-term average around 50:1.

Like gold, silver has benefited from safe-haven status following unrest in the Middle East, economic problems in Europe and global debt worries. Holdings in the iShares Silver Trust, the largest silver exchange-traded fund (ETF) in the world, increased by 179 tons to 11,140 tons in the week to March 24. Gold holdings in ETFs fell over the same time period.

Does this drastic collapse in physical demand and a breaking of the long-term average ratio to the downside signal an end to the current bull run? It is logical that silver would outperform gold in times of recovery. Its greater industrial use, increasingly in electronics and semi-conductors, benefits the metal in times of upswing, whereas gold favors unrest or uncertainty. But while there are those that question whether silver is gaining something of a bubble status and is due a correction, farther east, physical demand is still strong and may quietly be supporting the market. Since October 2009, China stopped exporting physical silver, and since that time, silver has not dropped in price. Reports mentioned in the Telegraph say China imported more than 100 million ounces of silver in 2010, although is suggests only 2.6 million ounces was as pure silver, suggesting the country is buying up ore and refining domestically. This would explain the widely reported tight mine supply market.

Much will depend on physical buying of pure metal and ores by both India and China in the months ahead. Silver may indeed be due a correction, and like all commodities prices, can only rise so far and so fast before a correction becomes due, but providing Indian demand returns and China continues to consume at current rates, it is hard to see a collapse in the silver price even from these heady levels.

–Stuart Burns

As a follow-up to our previous discussion about recent developments in carbon capture technology in the steel industry, we turn to the policy side of things by looking at the battle between Congress and the Environmental Protection Agency (EPA). The battle boils down to major sides (although of course there are others as well, including subgroups of the following): the environmentalists and the business community. The vote is scheduled to take place today.

According to The Hill, Senate minority leader Mitch McConnell introduced an amendment that would permanently block the EPA from regulating greenhouse gas emissions. Sen. Jay Rockefeller, a Democrat from Virginia, proposed to delay the EPA’s climate regulations for two years. Finally, Sen. Max Baucus proposed a concessionary amendment that would prevent farms and other small businesses from costs of compliance, but some say that’s won’t be the effect at all. Cap and trade failed in Congress, so why shouldn’t these amendments?

Simply because both Republicans and Democrats will be hard-pressed not to side with business interests on this one in light of high unemployment and stagnant growth. This is especially true for the 14 senators who face uncertain re-election, especially the Democratic ones. As the Wall Street Journal put it, “The question for Democrats is whether their loyalties to President Obama and EPA chief Lisa Jackson trump the larger economic good, not to mention constituents already facing far higher energy costs. Concern that the amendments will die in the Democratic-majority Senate, however, is uncharacteristically low for this one. According to the WSJ, McConnell may have the 13 Democratic votes he needs to get the requisite 60.

Back to “Environment Vs. Business, the League of Conservation Voters put out a poll showing that 63 percent of voters in Michigan, Ohio and Pennsylvania prefer the EPA to set greenhouse gas standards for industry. On the other side, the National Association for Manufacturers (NAM), among others, clearly has a vested interest in keeping compliance with existing and new emissions rules at a minimum, as their television announcement below, for viewers in Michigan, makes clear:


Source: NAM

Straddling the middle, as I often do, it’s clear that both sides cannot nor should they get absolutely everything they want. Should McConnell’s amendment win out? I don’t think so; even though new, overly strict EPA rules may be counterproductive, there should be some semblance of third-party oversight. Is the Baucus counter-amendment a shameless political ploy? Of course; the broad reach of the EPA likely should be scaled down. But should steelmakers and other manufacturers have financial incentives to do what they can to keep our drinking water clean and air less harmless than it was pre-1970 while keeping production efficient? Yes.

We’ll just have to see how this one plays out.

Perhaps the biggest hurdle to the widespread uptake of electric cars is not their comparatively short range, but the long time it takes to re-charge the batteries. If a car like the Nissan Leaf manages only an 80-90 mile range as this test suggests (as against the manufacturers’ 108 miles from a tank of sparks) you at least want to know you can re-charge and continue your journey, as with an internal combustion engine. In practice though, a Leaf takes seven to eight hours for a full charge using a 240V – 16A outlet as in the UK. Public quick-charging points are said to give an 80% charge in about 30 minutes. That’s OK if you want to have a cup of coffee and read the papers, but you don’t want to be doing that every 80 miles on a longer journey. So faster charging that would allow, say, a 2-minute turnaround similar to refueling a conventional car could open up use of cars like the Leaf to mainstream rather than just city users.

Well, research at the University of Illinois holds out just that promise, according to an article by the Economist. Their most successful experiment has recharged to almost 100% in two minutes. In addition, the technology applies equally well to nickel hydride batteries as to lithium ion. As the article explains, a battery has two electrodes, an anode and a cathode, that are connected by an electrically conductive material”generally a liquid”called an electrolyte. Under normal discharge conditions, negatively charged electrons flow from the anode to the cathode providing a source of electric current. To balance the circuit, positively charged ions flow from the anode to cathode to balance the charges. During recharging, an external source of electrons flows in the opposite direction replacing the positively charged ions ready for discharge again in the future. The speed at which a battery recharges depends on the surface area of contact between the electrolyte and the cathode, but crucially, the amount of energy a battery can hold is dependent on the volume of the electrodes. What is needed is both a high volume and a high surface area for cathode and anode.

Dr. Paul Braun at the university has developed a process to achieve just such an outcome. His starting material is made of closely packed polystyrene spheres about 0.001 millimeters (0.00004 inches) in diameter. The next stage is to fill the gaps between the spheres with nickel by electro-deposition, similar to nickel-plating a piece of steel. After that, the material is heated, to melt the polystyrene and leave a sponge made of metallic nickel. This creates an electrically conductive framework suitable for coating with materials normally used to make cathodes such as a substance called nickel oxyhydroxide for the nickel-metal hydride version of the battery and lithium ion-spiked manganese dioxide for the lithium ion version.

The result is a charging rate 10 to 100 times faster than a normal commercial battery, but with an increase in production costs estimated to be only 20-30 percent more than current methods. 20-30 percent is not to be dismissed, as the battery is a very significant part of the cost of new electric vehicles, but for the convenience of internal combustion “refueling rates, it may be a price worth paying over the life of the car.

How far Dr. Braun’s technology is from commercial application is unclear, but if the wall of money that has poured into new battery technologies is anything to go by, there is no lack of enthusiasm out there to find just such a solution to improving charging rates.

–Stuart Burns

Nothing gets the creative juices flowing more than a good debate! We, particularly, enjoy debates in which we see nearly opposite points of view, all within the same time period. In today’s headline match, we examine one side of a debate around the direction of metal prices, particularly for copper, aluminum, zinc and steel as a result of the Japanese earthquake and tsunami. In the ring we have Goldman Sachs, who laid out their point of view according to a recent Reuters Metal Insider piece: “Demand and price risk for industrial metals has now skewed to the downside due to recent developments including Japan’s earthquake disaster, and as tighter monetary policy is priced in. In the other corner, we have MetalMiner’s own Stuart Burns, who on March 17, only six days after the natural disaster suggested demand may appear down but not out (and with it, prices).

When we received a call from Wayne Atwell, managing director of Casimir Capital, and he offered up some commentary on the direction of metals and mining markets post-Japan tsunami, we wanted to know who would win the fight, so to speak. Wayne reminded us of a metric he and many others in the metals industries use to assess demand for particular products specifically, metal intensity. We have seen this metric expressed as a number (or quantity) per individual or, as Wayne explained, as a percentage of global consumption by country. He suggested the following metal intensity levels:

Japan: 4.7% of aluminum, 4.9% of copper, 4.2% of zinc and 2.4% of thermal coal

By way of comparison, China appears as follows:

41% of aluminum, 39% of copper and 41% of zinc

“The Japanese economy has been hurt badly¦in the short term, they will consume less material. But metal prices are higher today then when this story unfolded. The earthquake/tsunami has thus far had no detrimental affect on prices, Wayne said, though he did acknowledge that the rebuilding effort will go “slower than you think. The sheer task of removing debris, gas shortages and moving goods in and out of the country will make for a slower recovery. Plus, designs will have to be drawn up and approved. From a commodities perspective, we can expect the demand to increase in about a year to a year and a half.

Which metals will likely [eventually] benefit from increased demand as Japan rebuilds? According to Wayne, “Zinc is the one on the top of the list   – 45% of zinc goes into galvanizing, 33% of copper goes into building plumbing and electrical and the like. Aluminum is pretty far down the list 10% of aluminum goes into building (much smaller).

But some metals supply markets will remain in short supply far in advance of any rebuild. In particular, according to a recent report from The Smart Cube, though annual steel production will likely drop due to rolling brownouts (and the Chinese will likely pick up the slack), two areas within the Japanese steel sector may create global supply shortages and subsequently, higher prices hot rolled heavy plate and galvanized sheet. The Smart Cube report gives an excellent overview of other supply markets in which Japan plays a key role.

But in essence, according to Atwell, “the market has sort of yawned at commodity prices. Uranium is down, coal is up as is natural gas, though that is harder to transport. You would need an LNG terminal for that. Hydro power is already operating at 100% of capacity.

Certainly, commodities tied to energy sources (nuclear uranium being the one exception) will see price escalation. Beyond that, whether falling demand or tight supply will deliver the knock-out blow, we may have to wait it out and go the distance.

–Lisa Reisman

(Continued from Part One.)

As the DOE’s Industrial Technologies Program has a hand in funding or guiding most of the following research on how to reduce steelmaking emissions, the latter half of the report detailing the new technology options reads much like a commercial at times; nonetheless, some of the efforts are worth detailing.

Hydrogen infusion and electrolysis processes have proved to be good reducing agents in producing iron, therefore taking down energy intensity considerably, and have been proposed to take the lead in overall emissions reduction in the steel industry. The American Iron and Steel Institute and the University of Utah undertook efforts five years ago to reduce emissions in the hydrogen reduction process of making iron. They primarily addressed material and energy balances, chemical calculations, evaluating behavior of impurities, and testing a simulation of the reduction process, which proved viable.

Electrolysis, on the other hand (used in aluminum production), emits no carbon as a process byproduct whatsoever. The AISI is also involved in this development (along with MIT), as is the Ultra-Low Carbon Dioxide Steelmaking (ULCOS) European consortium.

Source: DOE, AISI, MIT

Another proposed technology, which may sound more familiar to those outside the industry, is carbon capture and sequestration (CCS). Although equally intriguing and mind-blowing the physical capturing and storing CO2 in various places, such as under the ocean the DOE study admits that the economics behind it are sketchy at best. Indeed, it would cost companies and taxpayers a lot of money in the short- to medium-term, not to mention decrease efficiency of energy production, as outlined in my colleague Stuart’s May 2010 post. US DOE Office of Fossil Energy research from 2007 put the cost of capture at $150 per ton of carbon using today’s technology. These costs, according to other studies, would level out over the next two or three decades.

Granted, capturing carbon emissions from the steel industry is admittedly a much smaller endeavor than doing the same for the electricity generation and thermal power production industry as a whole, which makes up nearly 70 percent of all US CO2 emissions. Also, the nature of carbon emissions from steel production is different the Industrial Technologies Program points out that highly concentrated C02 emissions can be “easily captured from flue gases. In essence, the capture of carbon will be more fully and seamlessly integrated with steps in the steelmaking process, unlike burning coal for electricity. Ultimately, however, the costs involved and implications of it must nonetheless be fleshed out. To quote from the report:

“It will be very difficult for the steel industry to meet the CO2 emissions reduction goals called for in proposed climate policies. Available reductions using best available technologies amount to a mere 12% of current emissions intensities, while proposed policies call for 50%80% economy-wide reductions.

One thing is clear: US steelmakers will have to incur hefty costs monetary and otherwise to comply with recently imposed governmental emissions standards.

–Taras Berezowsky

We have written on several aspects of business and the metals markets in Brazil recently; the latest just last week about Gerdau Steel raising billions in a share sale with the probable intent of bidding for one or more of its major domestic competitors. Generally that is taken as a positive sign; although to invest in new facilities for organic growth rather than acquisition would be better, at least buying competitors is a vote of confidence in the economy’s future.

So what should we make of the spat developing between the government of new president Dilma Rousseff and Vale, reported in an FT blog article? Apparently, Vale’s high-profile chief executive Roger Agnelli’s contract is coming up for renewal in May and the government is making every effort to prevent his re-appointment. Although Vale was privatized in 1997, the firm is Brazil’s largest exporter and along with Petrobras, the national oil company, a major source of foreign exchange and tax revenue. Vale tripled profits last year to $17 billion on the back of some $47 billion in revenues according to an FT article this week.

At the heart of the issue is the government’s desire to channel much of the investment and revenues internally to Brazil’s benefit, rather than as the free market has suggested is the most efficient for the firm. The government wants Vale to invest more domestically in developing the steel industry and less on mining iron ore to export to China. Brazil suffers a serious balance of trade deficit with China, part of which is made up of flat rolled steel imports supported by a strong real, making imports more competitive than domestic production. The government is also livid that Vale invested in a fleet of bulk ore carriers to be built in China and South Korea rather than being built in Brazil. Needless to say, the government would also like to get its hands on more of that $17 billion in profits for the state coffers.

In any normal company the shareholders would be expected to resist the replacement of a highly successful CEO and by default the rest of the seven executive directors who have said they would not tolerate a forced change. But in the case of Vale, most of the shareholders are state enterprises. BNDES a government run development bank, and Banco do Brasil, the country’s biggest state-run bank, will be easier to persuade; Bradesco, a listed bank, will be harder to strong arm, but the finance minister Guido Mantega held a meeting last week with just that in mind.

The outcome will say a lot about Brazil and where it is going. Does it honestly hold to the principals of a free market, or is it slipping into socialism? As the article quotes a party close to the board: “This is an attack on the institution, whoever they hire next will have to abide by the government’s rules and no other professional executive wants to be a part of that. We really are at a turning point, and this is a very dangerous situation, not only for the company, but for the whole country. Are we going to go down the path of the free market or the path of Venezuela?

–Stuart Burns

The major takeaways from a new report issued by the US Department of Energy (DOE) are that 1) the US steel industry can boast some of the lowest CO2 emissions in the world, but that 2) new technologies will still be needed to bring the CO2 emissions even lower to come in line with government mandates. But the whole story of the DOE report is only helpful if we use the US CO2 figures to look at the broader global context.

The gradual yet significant reduction in American steel’s CO2 emissions can mainly be attributed to the shift from OHF (open-hearth furnace) production to BOF (basic oxygen) and now EAF (electric arc) production; and the increased use of scrap. According to the report, EAFs accounted for 62 percent of US steel production in 2009. These trends have led to US steel reducing carbon emissions by 35 percent since 1990, making the industry’s CO2 intensity the second lowest in the world after Korea. But the most worrisome story is told in the following graphs, which look at both energy intensity (2.4) and CO2 intensity (2.5) as compared to percentage of steel made through EAF production in each respective country:


Sources: DOE; IEA data

Clearly, the trouble in energy consumption and CO2 emission lies with China, Russia and Ukraine. The three nations have the lowest percentage of EAF mills. (Other sources outside the DOE put China’s percentage of EAF production closer to 5 percent, not 10 percent). The paltry energy efficiency in Ukraine and Russia is due to outdated equipment; but the combination of breakneck growth, laxer-than-standard environmental policies, voracious coal and iron ore consumption, and lion’s share of the steel producing market make China the force to be reckoned with when it comes to global, steel-related CO2 emissions. (Interestingly, India was left off the charts above, “because of an unknown data problem in the IEA data set, according to the DOE report. Hmm. I’m sure not all is green and clean in India either.) Consider that China accounted for 47 percent of total world steel production in 2009 — while the US was responsible only for 5 percent and it’s clear that the focus on emissions standards should squarely be placed on Beijing’s policies.

To put the relationship between power production and steelmaking into context, consider that 41 percent of global CO2 emissions came from generating electricity and heat in 2008, according to a separate report from the International Energy Agency. China, India and other emerging economies produce 69 to 94 percent of their electricity by burning coal. By 2030, demand for electricity will be almost twice as high as it was in 2009.

So, as China continues to lead the world in making steel, it will increasingly need to burn more fuel to do so, using more electricity, etc. etc. The majority of Chinese steel is still made with raw iron ore as opposed to scrap; very energy intensive. On the flipside, EAF production uses much more electricity than BOF. So once China’s percentage of EAF mills goes up, so will electricity consumption most of which is produced by coal combustion. Where to get to the bottom of all this? How to best pinpoint and execute emission reduction?

Ultimately, the pinpointing of emission sources and inputs is the biggest issue with this study or any study, for that matter. As the DOE outlines, the problems that arise in calculating emissions for the steel industry:

“Accounting challenges, such as the following, can occur across the entire system and skew study results:

  • Double counting of energy flows: Energy associated with coking coal, as well as its associated products of coke, coke oven gas, and blast furnace gas, may both be counted.
  • Double counting of emissions: Emissions associated with ore reduction may be counted as both process and energy-related emissions.
  • Upstream boundary issues: Energy use at mines for iron ore agglomeration (i.e., sintering and/or pelletizing) and energy used in coke ovens may be included or excluded in totals.
  • Downstream boundary issues: Whether to take energy or emissions credits for energy production from blast furnaces and coke-making being sold to other consumers.
  • Issues of energy accounting for electricity: The energy content of electricity can be counted as either primary or end-use energy.
  • Ore quality: The varying quality of ores and coking coals throughout the world.
  • Heterogeneity: The treatment of steel as a homogenous commodity, when in fact there are several different types with very different energy intensities”

The question then becomes, if we’re not 100 percent sure of how our emissions figures are derived or exactly how accurate they are, then how do we know which new technologies to tackle? And how effectively can the US government regulate the steel industry, let alone the governments of other nations? Check back in tomorrow for Part 2.

–Taras Berezowsky

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